Employee Retention Tax Credit For COVID-19 Relief in 2021


The employee retention tax credit keeps your employees on the payroll. Employers who lost business and revenue due to COVID-19 may be eligible.

Employee Retention Tax Credit For COVID-19 Relief in 2021

The Consolidated Appropriations Act changes the employee retention tax credit for 2021.

The CARES Act allowed employers to use the credit or the Paycheck Protection Program (PPP). Now, employers may take advantage of both, with certain limitations.

The credit motivates businesses to keep employees on their payroll during COVID-19.

Continue reading to learn more about this tax credit for COVID-19 relief in 2021. Plus, learn how to get professional tax help if you need it.

What is the Employee Retention Tax Credit?

The government wanted to keep people employed during COVID-19. The tax credit is an incentive to keep employees on the payroll.

The law began under the Coronavirus Aid, Relief, and Economic Security Act (CARES). It is a refundable credit of 50% of qualified wages by an employer that suffered during COVID-19.

Under the new act, significant changes apply. Qualified employers who can take advantage as the coronavirus pandemic continues.

Credit Availability Timeline

The original rule was for wages paid March 12th, 2020, and before January 1st, 2021.

The new law extends the qualified wages paid to July 1st, 2021. The availability extended two quarters for the beginning of 2021.

Wage Qualifications and Calculations

Wages subject to FICA taxes and health costs are part of credit eligibility. The goal for the employee tax credit is to reimburse those who are not working.

Wages paid after March 12th, 2020, through June 30th, 2021 qualify.

The IRS includes the pretax wages calculating qualified health expenses.

Before determining which wages qualify, there are definitions for full-time employees and limits.

For instance, a full-time employee works 30 hours per week or 130 hours a month in any month of 2019. Other tips to determine wage qualification include:

  • If you were in business at all in 2019, total all the full-time employees of every calendar month and divide by 12.
  • An employer who began a business in 2020 must total the full-time employees in 2020. Divide by the number of months the company operated in 2020.
  • An employer who began a business in 2019 takes the sum of each full-time employee in 2019. Divide by the number of months the company operated.
  • After determining full-time employees, qualified wages will become more evident.
  • Entities with more than 100 full-time employees can only use the wages of those not working.
  • For larger employers, wages for paid day-offs cannot be part of the qualified wages.
  • Entities with less than 100 full-time employees can use all employee wages. Paid leave is exempt under the Families First Coronavirus Response Act. Keep in mind, the threshold increases to 500 at the beginning of 2021.

IRS Preventions

The IRS has specific preventions, such as:

  • No double-dipping for credits. Employers cannot take the tax credit on the same qualified wages for paid family leave.
  • Employees included in the Work Opportunity Tax Credit (WOTC) do not qualify for the tax credit.

Employers must consider which credits to use that will be better for their business.

Credit Amount

There are two different criteria due to changes for 2020 and 2021.

The tax credit applies to 50% of qualified wages, $10,000 after March 12th, 2020, to January 1st, 2021.

The tax credit applies 70% to qualified wages up to 10,000 per quarter after January 1st, 2021. Employers can receive $14,000 max per employee through June 30th.

How Do the Credits Work?

The tax credit is refundable and allowed against an employer’s Social Security taxes.

The government receives a refund if the employer obtains excess credits.

You may use Form 941 to adjust the number of credits every quarter.

How to Claim This Credit

This tax credit is a refundable tax credit against payroll taxes reported quarterly.

Your company receives credits by taking out deposits of payroll taxes. These are usually withheld from employee wages.

Use Form 941 to report wages and related health insurance costs for each quarter. Begin with the second quarter of 2020.

You may receive a payment in advance by submitting Form 7200 to the IRS.

Eligibility Requirements for Employee Retention Tax Credit

Most businesses may qualify for the credit, including tax-exempt organizations.

Two primary qualifications for eligibility requirements include:

  • Trade or business suspended during any quarter in 2020 because of government orders.
  • A company is experiencing a “significant decline in gross receipts” for the quarter.

For the tax credit, a trade or business means making a profit with regularity and continuity.

It is the same definition as Section 162 of the Internal Revenue Code from the IRS.

“Significant decline in gross receipts” starts in the first quarter of 2020. The decline in gross receipts is less than 50% of its 2019 gross receipts for the same calendar year.

The decline ends when gross receipts are greater than 80% for the same calendar quarter in 2019.

The 2020 and 2021 first calendar quarters also apply to the 80% decline.

Employers affected by COVID-19 closures are most eligible. Businesses must experience a 20% drop in gross receipts compared to 2019 for the same quarter.

Two types of companies generally do not qualify:

  • Essential businesses, unless COVID-19 affected their supply, causing them not to operate.
  • The business closed but can still manage via remote work.

If you are a new business, you can use the gross receipts of the quarter you began since there are no 2019 references.

If you are unsure if you qualify for the employee retention tax credit, contact a tax expert today.

Self-Employed or 1099 Individuals

Unfortunately, self-employed individuals cannot take advantage of the tax credit towards their earnings.

If they hire other individuals in their business or trade, they may qualify. Because this may be a gray area, is it essential to consult a tax expert.

Government Entities

The federal government is not qualified for the tax credit.

This includes State, local, or political subdivision. Entities that are “instrumentality” towards the federal government are also not eligible.

The IRS considers an organization “instrumentality” to the government with these six factors:

  • If the organization is for a governmental purpose and function of the government
  • If the organization’s role is on behalf of political subdivisions, or one or more states
  • If there are private interests involved; the entity has powers and interests of an owner
  • If a public authority controls and supervises the organization
  • If implied authority is necessary for creating the instrumentality of the organization
  • Operating expenses and the degree of financial autonomy

Starting January 1st, 2021, state or local colleges providing health care may qualify. Also, organizations chartered by Congress, such as Federal Credit Unions or Fannie Mae.

Tribal Governments and Tribal Entities

A tribal government is eligible for the employee retention tax credit.

The IRS uses Section 162 to determine trade or business operation eligibility. Tribal operations are not subject to income tax.

Yet, tribal government or entities are exempt from Section 162.

The IRS uses different rules to determine if a tribal government carries a trade or business.

For the tax credit, the IRS will consider all activities of the tribal government or entity.

The IRS will treat it as though it involves a business or trade.

Tribal governments receive this exemption, while others fall under Section 162 IRS code.

US Territories

Employers in US territories may be eligible for the employee retention tax credit.

The CARES Act defines eligible wages for the tax credit using FICA. Qualified wages from employers in US territories are subject to FICA.

As a result, US territories may apply for the employee retention tax credit.

Household Employers

Household employers do not meet the criteria under the IRS Code as a business or trade operation. Thus, they are not eligible for the tax credit.

Household employers hire others for housework, such as housekeeping, babysitting, and others.

Those who pay employment taxes from another business operation may be eligible.

The qualified wages must come from a trade or business, reported on Form 941 or annual tax return.

PPP Loan Recipients

Under the CARES Act, those who received PPP loans were not eligible for the tax credit.

This rule extended towards another company with 50% ownership that received the loan.

Under the new law, a company that receives a PPP loan may apply.

The wages claimed do not go towards the proceeds that the PPP loan covers. This is double-dipping, which is not allowed.

Under the new rules, the change is retroactive for wages paid after March 12th, 2020. You can file a changed employment tax return to claim the credit.

You may also file an amended employment tax return if you are an affiliate of a PPP recipient.

The new law allows partnered companies to file for credit. Wages paid after March 12th, 2020, are eligible as qualified wages.

Advanced Payments

Under the CARES Act, advanced payments were not allowed.

Under the new law, the Treasury allows advanced payments for 500 or fewer employees. The basis they will use is the 70% average quarterly payroll for the same 2019 quarter.

If the credit amount after the quarter is less than the advance payment, the business must refund it.

Pay Increases

Before, pay increases were not allowed.

Now, pay rate increases may apply. This includes credit for hazardous duty pay increases, amongst others.

Differences Between CARES vs. Consolidated Appropriations Act

There are significant differences between the two laws. Each has different qualifications for the employee tax credit.

Some of these changes include:

  • Period: The credit under the CARES Act was available from March 12th, 2020, to January 1st, 2020. Under the Consolidated Appropriations Act, it extended wages paid before July 1st, 2021.
  • Wages: Before, eligible employers may take a tax credit against 50% of qualified wages. Under the new law, it is 70% qualified wages.
  • Credit limit: Max credit per employee was $5,000 for qualified wages during 2020. Under new rules, the max credit extended to $7,000 per quarter for qualified wages during 2021.
  • Employer threshold: Two separate rules apply under the CARES Act for businesses. A rule for more than 100 full-time employees. Another for less than 100 full-time employees. Under new changes, the threshold rose to 500 or fewer employees.
  • Gross receipts: CARES requires 50% gross receipts for qualified wages. Under the new law, gross receipt decline may be less than 80% in the same quarter as 2019.
  • PPP Eligibility: Those who received a PPP loan under the CARES Act were not eligible for the tax credit. Under the new changes, employers who took a PPP loan may now receive the credit. This includes retroactive wages. Double-dipping is not allowed.

The newly signed law offers more flexibility compared to the CARES Act. Businesses can get relief during the pandemic and continue paying employees.

Contact ATAX Today!

If you need more help on the employee retention tax credit, call ATAX today at 1(866)999-2829. Visit any of our offices by browsing our ATAX locations.

At ATAX, we strive to help others file:

  • Personal taxes
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If you have not filed your taxes, contact us by phone or visit today!


We answer common questions about the employee retention tax credit.

Who Qualifies For This Tax Credit?

Businesses who cannot operate due to COVID-19. Essential or remote work is not eligible.

How Many Employees Must I Have On the Payroll?

The max limit is 500 employees under the Consolidated Appropriations Act.

What Is the Max Amount of Credit?

For 2020, the max is 50% qualified wages at $10,000. For 2021, the first two quarters are 70% qualified wages, max $14,000. About $7,000 per quarter at the start of 2021 applies.

What Period Are the Qualified Wages For?

Under CARES Act, March 12th, 2020 through January 1st, 2021. Under Consolidated Appropriations Act, qualified wages extend before July 1st, 2021.

What Are the Main Differences Between CARES and Consolidated Appropriations Act?

The new law provides more for businesses and an extended period for qualified wages. Also, PPP loan recipients may now apply for the tax credit. The max credit amount increased from 50% to 70%.

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